COSATU Parliamentary Submission: Input for Discussion on the

South African Debt

Presented to the Portfolio Committee on Finance, 22 October 1998

 

Contents

  1. Background: GEPF’s impact on Debt

  2. Restructuring the GEPF to free-up resources

    1. What would the restructuring of the GEPF entail?

    2. What will the benefits be of restructuring the GEPF?

    3. Why is a pre-funded system not a priority?

    4. What reaction would there be to a restructuring of the GEPF?

  3. Conclusion



This input is prepared for the Portfolio Committee on Finance’s "Discussion on the South African Debt". It does not attempt to provide a comprehensive analysis of the debt situation, but rather outlines some of the thinking behind COSATU’s support for the proposal that the restructuring of the Government Employees Pension Fund (GEPF) would assist in alleviating the constraints which 'debt' places on public expenditure.

  1. Background: GEPF’s impact on Debt

    2. In recent years government debt has been on the rise. It increased from R80bn in 1989 to R300bn in 1996. An important driver of this increase in 'debt' has been the increased allocation of resources to the GEPF, the assets of which have grown from R31bn in 1989 to R136bn in 1996. The reason for this increase has been the policy decision taken in 1989 to move the GEPF towards a pre-funded system. As a result, more assets are paid into the GEPF each year than is the Fund’s annual obligation to its beneficiaries.

    In COSATU's view the decision to prioritise the move to a pre-funded public sector pension fund, instead of prioritising expenditure on housing, education, welfare, etc, constitutes a misallocation of the scarce resources of the state and runs counter to the stated policy of reprioritising expenditure in favour of basic needs. We, therefore, continue to rally support for the restructuring of the GEPF’s financing mechanisms with the objective of expanding the resources available for RDP delivery in a manner which does not undermine the sustainability of the public sector pension system.

  2. Restructuring the GEPF to free-up resources

    3. A major proposal which COSATU, together with other trade union federations NACTU and FEDUSA, has made to the forthcoming Presidential Job Summit is that the financing of the GEPF should be restructured.

    The following issues need to be amongst those considered in restructuring the GEPF.

    1. What would the restructuring of the GEPF entail?

      2. Restructuring could be pursued along the following lines:

      • The present policy of pre-funding the GEPF should be replaced with a policy which seeks to allocate only the actual pension payments for any given year. There may be space for some flexibility in this regard, as presently the GEPF is about 70 percent funded, and a new financing mechanism could target funding somewhere along the continuum between ‘full-funding’ and ‘pay-as-you-go’.

      • The manner in which the pre-funding of the GEPF is reflected in national accounts creates the appearance of higher levels of government expenditure and deficit than would be the case if the national accounts only reflected the resources needed to pay civil servant's benefits each year ('pay-as-you-go'). To assist in remedying this the Smith Committee's recommendation should be adopted that "more detailed and factually correct figures be prepared by the Department of Finance… [and] presented to the international community for the purposes of comparing South Africa's economy with the rest of the world". Rather than "the national accounting convention which is currently accepted [which] presents an extremely unfavourable picture of a country which pre-funds its pension funds".

      • As an aspect of the restructuring exercise, the impact of the recent trend which has seen a shift of GEPF assets from bonds to equities should be investigated: in particular, the associated cost of private asset management, the impact of fluctuations in the equity market, and the possible upward pressure on interest rates resulting from the sale of bonds in order to shift into equities.

    2. What will the benefits be of restructuring the GEPF?

      • It is estimated that even within the present deficit target framework the shift to a pay-as-you-go system would have enabled government to spend about R10,2bn (2,1% of GDP) in 1996 and R8,5bn (1,6% of GDP) in 1997. Even more so, a move away from a pre-funded system, combined with a commitment to a more expansionary post-GEAR macro-economic framework, has the potential to provide the resources necessary to mobilise institutions and capacities for more effective service delivery and employment creation, and so lift the economy onto a new growth and development path.

      • A shift away from a pre-funded system would assist in releasing resources to minimise controversial, painful and short-sighted cut-backs, for example in health and education expenditure, which as outlined in the MTEF are set to decline in real terms over the next few years.

      • A restructured GEPF would also give government discretion and control over a greater portion of its fiscal resources. Instead of being required to allocate resources for the pre-funding of the GEPF, which increasingly is being invested in equities by private asset managers, government will be in a position to allocate these resources where there is the greatest need and as part of a transformative expenditure programme. This will assist in ensuring that development and empowerment is broadly based rather than narrowly confined to a small elite which is able to channel the GEPF’s resources in such a way that primarily benefits itself.

    3. Why is a pre-funded system not a priority?

      • There is an argument that in many countries where pay-as-you-go type pension funds have been the practice problems have emerged because aging populations have resulted in an increase in the number of pensioners to the number of people in the workforce. But, these arguments should not be applied uncritically to a South African situation where the proportion of pensioners to public sector employees may today be higher than it is likely to be in the future. If this is the case, the proportion of pensioners to employees will decline taking pressure off the pension fund.

      • While pre-funding may be necessary to protect employees in instances where private companies are rendered insolvent, this is not an argument which can be readily applied to government. This misplaced argument may, however, have gained currency amongst predominantly white civil servants under the previous regime who felt insecure about their pensions under the new government. This may explain the timing of the decision to move to introduce a pre-funded system in 1989. At this point, in 1998, government has clearly stated its commitment to meet its pension obligations and, furthermore, is legally obliged in terms of agreements reached at in public sector collective bargaining to pay out public service pensions. Therefore, public servant distrust and insolvency-based arguments cannot be used as a valid basis for increasing GEPF pre-funding levels.

      • Another reason why pre-funding is no longer a priority for public servants is because pre-funding is because the policy puts unnecessary pressure on government finances which is ultimately used to justify the planned cutbacks of the public service. The best security for public servants that they will ultimately receive adequate pensions is that they are able to retain their jobs in an effective, developmental public service which is able to play an effective role in stimulating growth and development.

    4. What reaction would there be to a restructuring of the GEPF?

      • It would be important that there be complete transparency regarding any decision to restructure the GEPF. Time and effort would have to be dedicated to explaining the thinking behind the proposed restructuring, the likely beneficial impact in the short and long term, the long-run sustainability of the restructuring and the international precedent for the proposals.

      • If properly managed, the GEPF restructuring has the potential to improve South Africa’s risk profile. The current pre-funding of the GEPF worsens our risk profile as it has the effect of dramatically increasing the level of government debt. Studies have shown that if a pay-as-you-go system had been adopted rather than the present pre-funding system, the share of government debt to GDP (in 1997) would have been 29,9% instead of the actual reported level of 58,6%.

  3. Conclusion

    4. COSATU has for some time now been supported the restructuring of the GEPF in order to ease South Africa’s debt constraints in order to free up more resources for effective RDP delivery. Our fellow trade union federations, NACTU and FEDUSA, have also supported our proposals to the forthcoming Presidential Job Summit in this regard.

    We trust that Members of Parliament and government officials will welcome with open arms this positive and constructive stance taken by a united front of South African labour. As we believe that effective implementation of these proposals will assist in promoting economic development for all.

    We applaud the Portfolio Committee on Finance for its decision to host a public discussion on this important policy question and believe that it reflects the Committee’s sensitivity to the increasing support in civil society, amongst churches, NGO’s, labour and enlightened elements of the business community for appropriate measures to ease government’s debt burden.



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